Our research interest is mainly inspired by the question how different outlets of the same franchise chain react to one another as the demand externalities of the quality of services exist in the chain. We analyze mainly the horizontal relationship between franchisees with focus on their interactions on service quality. Starting from a simple formal model with two independent outlets, we will present the analytic form of the optimal reaction function on which is based the interaction of two outlets. As a result of the interaction, the optimal service quality of two outlets rather increases than decreases.
CONTENSOU, F. and LEE, J. (1999). Interactions on the Quality of Services in Franchise Chains: Externalities and Free-riding Incentives. ESSEC Business School.